Computer and technology innovations play a vital part in improving the service sector, but Kiwi firms are not extracting the full potential of these technologies, a new report suggests.

The Productivity Commission is inviting public feedback on the first of a two-part initial report from its inquiry into service sector productivity.

Services such as using the internet, dining out or visiting the doctor make up the largest sector of the New Zealand economy.

But the sector's production growth is close to levels in the primary and goods-producing sectors, which have lagged behind the average of Organisation for Economic Co-operation and Development countries since the mid-1970s.

Chief commissioner Murray Sherwin said information and communications technology (ICT) had become particularly important to the service sector because it lessened the impact of distance, particularly for exports.

However, even though New Zealand had invested in ICT at a relatively high rate, many firms had failed to turn that investment into sufficient productivity growth.

"We seem to invest about as well as anyone does, but we're not getting the gains out of it," Sherwin said.

"Often that means that we're taking existing processes and web-enabling them or computerising them, but not really doing what the US has done in some sectors ... and use the technology to really shift the business model and drive productivity gains."

The service sector was huge but not well-understood, Sherwin said.

"It's deeply intertwined with the rest of the economy and we get very focused on primary industries and big conferences about manufacturing, but actually they all have a huge amount of services embedded in them, including our exports.

"We understand much, much less about services. We tend to regard them as third-class jobs, low skills, low pay and there's certainly some of that ... But there are also sectors where other countries have done really well."

An example was the big relationship between ICT and productivity in the US retail industry.

"A similar scenario played out in Australia's wholesale trade industry - which made a major contribution to Australia's overall productivity growth in the 1990s," the report said.

"During this period wholesalers were not necessarily investing more heavily in ICTs, but they were using technology more productively."

New Zealand's wholesale and retail industries, by comparison, were both relatively poor productivity performers.

This had a flow-on effect to other industries and limited choice or raised prices for consumers.

"More effective use of ICT in the wholesale and retail industries could have benefits that extend beyond these industries."

The commission acknowledged that scale was part of the problem, with the small size of many service firms in New Zealand acting as a barrier to investment.

It suggested greater collaboration among firms might help to address some of the cost issues and speed up the dissemination of effective technology.

But firms were reluctant to do it, "out of concern that they could breach competition laws".

The services sector had a similar level of labour productivity to other parts of the economy - about $50 of value-added per hour of labour input.

"But this average for the sector masks large differences across service industries reflecting differences in capital intensity, skills and other factors."

The next part of the commission's inquiry, due in January next year, will take an in-depth look at two service sector topics yet to decided.

One possible topic is whether the Government could or should stimulate more competition among services, as it had in the telecommunications market.

The Government had also had some success with the "what's my number" electricity switching campaign, and there were potential benefits from more competition in the KiwiSaver industry.

An alternative topic was the regulation of occupational licensing. Regulations around occupations such as real estate agents, pharmacists and lawyers helped protect consumers but if overused, they could also stifle competition, Sherwin said.

Both reports will be compiled into a final report, which is due to be delivered to the Government in April.

THE FACTS

* The service sector covers more than 70 per cent of New Zealand's registered businesses and jobs.

* In 2009, service exports earned $12.7 billion. The sector effectively contributes more than half the country's exports.

* More than three-quarters of service exports relate to travel or transportation.